Reduce Your Death Tax with a Personal Residence Trust

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Summer Beach HouseWhat is the best way to handle the family vacation home when planning your estate?

You’ve had a cottage by the beach or in the mountains that the family has used for years as a retreat. All the children have a connection to the property. Do you leave it to all of them and let them work out the details after you’re gone? A Qualified Personal Residence Trust (QPRT) might be an option worth considering. Gifting a vacation home to a QPRT can reduce your estate’s value for death tax purposes, and ultimately will pass on the property to your heirs.

The trust document will specify the term and what happens to the assets held in trust once that term concludes. An independent third-party appraisal on the property sets the value of the property you intend to contribute to the QPRT. The property is then transferred to the QPRT for the term of years specified in the trust document. You can continue to use and enjoy the property held in trust the same way you did before it was owned by the trust.

Once the term of the trust ends, the property is transferred outright to the designated beneficiaries. You may still use the property, but you will need to pay reasonable rent to the new owners. The goal should be to make the term short enough that you expect to outlive the trust. If you do not survive through the term of the QPRT, the home would be pulled back into your taxable estate and you’ve done nothing to help your estate.

The advantage of using the QPRT is the ability to discount the value of the home from current fair market value. The projected residual value of the property at the end of the term is used for gift valuation. The value of the property generally could be much less than current market value. Gifting now into the QPRT will lock in the current value of the property and protect your estate from any future appreciation.

This arrangement should not be entered without careful consideration. It’s important to remember the QPRT is an irrevocable gift. Are you ready to pass ownership of the property to the next generation? Do you think your children are ready to become owners of the property and can work together to take care of it?

Another important consideration is that your heirs intend to hold the property long term. The minimum should be through the term of the trust. A sale during the term of the trust could reduce the benefit for estate tax planning and may defeat the original purpose of the tax planning. Subjecting the property to a mortgage will also complicate the transaction. It is generally best to transfer a property that is free of liens.

QPRTs can be a good solution for intra-family transfers of property, particularly second homes that are intended to remain in the family through the next generation. Family dynamics, duration of the trust, and personal feelings about the transfer of ownership need to be carefully considered before entering into this arrangement.

QPRTs can be an excellent way to reduce death taxes by taking advantage of discounting and ensure that a beloved vacation home remains in the family.

Rick’s Tips:

  • A Qualified Personal Residence Trust (QPRT) can reduce an estate’s value and lower death taxes.
  • QPRTs are irrevocable and the donor must outlive the trust in order for it to be effective.
  • QPRTs can be an excellent way to ensure a vacation home remains in the family.

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